GENERAL AGREEMENT ON RESTRICTED L/7028 29 June 1992 TARIFFS AND TRADE Limited Distribute

Original: Spanish

ACCESSION OF

Memorandum on Foreign Trade Régime

The following Memorandum on the Foreign Trade Régime has been received from the Government of Honduras. In order that the matter may be examined by the Working Party (L/6735), contracting parties are requested to communicate to the secretariat by 30 July 1992 any questions they may wish to put concerning the matters dealt with in the Memorandum, for transmission to the authorities of Honduras.

92-0879 L/7028 Page 2

CONTENTS

Page

FOREWORD 5

I. THE HONDURAN ECONOMY 6

1.1 Introduction 6

1.2 Structure and performance of the Honduran economy 6

1.3 Foreign trade, balance of payments and external debt 9 1.3.1 Foreign trade 9 1.3.2 Balance of payments 12 1.3.3 External debt 13 1.4 The structural adjustment programme launched in March 1990

and its results 14

II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES 18

2.1 Introduction 18

2.2 Institutional framework 18

2.3 Structure of trade policy formulation 18

2.4 The new trade policy 20

III. EXPORT POLICY 21

3.1 Introduction 21

3.2 Legal provisions 21

3.3 Export taxes and charges 22

3.4 System of export incentives 22 3.4.1 Export promotion 22 3.4.2 Export promotion customs régimes 22 3.4.3 Temporary Import Régime (RIT) 23 3.4.4 Industrial Processing Zones for Export Trade (ZIP).. 24 3.4.5 export incentives 24 3.4.6 Technical assistance 25 L/7028 Page 3

Page

IV. IMPORT POLICY 26

4.1 Introduction 26

4.2 Legal provisions 26

4.3 Characteristics of the tariff régime 28

4.4 Other import levies 29 4.4.1 Surtaxes 29 4.4.2 Selective consumption tax 29 4.4.3 Production and consumption tax 30 4.4.4 Sales tax 30

4.5 Customs rules and procedures 30

V. TRADE RELATIONS AND AGREEMENTS WITH OTHER COUNTRIES 33

5.1 Introduction 33

5.2 Economic Community of the Central American Istmus 33

5.3 Partial-scope agreements 34

5.4 Other trade agreements 35

VI. OTHER TRADE-RELATED ASPECTS 36

6.1 Introduction 36

6.2 Exchange policy 36

6.3 Legislation recently adopted or in the course of approval. 38

STATISTICAL TABLES 41

Table 1 by Economic Activity 42 Table 2 Balance of Payments of Honduras 43

Table 3A Honduras : Total External Debt 44

Table 3B Honduras : Public External Debt 45

Table 4 Honduras: Selected Macro-Economic Indicators, 1989-1991 46 L/7028 Page 4

Page

Table 5 Duties and Charges on Exports 47

Table 6 Honduras : Production and Consumption Taxes 48

LIST OF ANNEXES 50 L/7028 Page 5

FOREWARD

This Memorandum on the Foreign Trade Régime of Honduras has been prepared in the context of the process of the country's accession to GATT. The Memorandum will serve as a basis for discussion in the Working Party on the Accession of Honduras established by the GATT Council.

The Memorandum includes a brief account of the Honduran economy, including its structure and performance, developments in foreign trade, the balance of payments and foreign debt, and the features of the Structural Adjustment Programme (Chapter I). This is followed by a description of the current trade policy régime (Chapter II). The current export and import policies are described in detail in chapter III and Chapter IV, respectively. Chapter V deals with trade relations between Honduras and the other Central American countries and trade agreements with other countries. The final chapter summarizes other measures relating to foreign trade, including exchange policy and legislation recently adopted or in the process of enactment.

The Memorandum describes measures and legal provisions in force at the time of its preparation as well as measures that are in the course of adoption. It should be noted, however, that the Government of Honduras will inform contracting parties in a timely manner, through the GATT secretariat, of any new measures adopted in relation to the matters covered in the Memorandum. L/7028 Page 6

I. THE HONDURAN ECONOMY

1.1 Introduction

The Republic of Honduras is situated in and has an area of 112,088 km. , with a characterized by an irregular topography consisting of mountain systems and valleys of varying fertility. Almost two thirds of the territory consist of pine forests and broad-leafed forests, which form large and complex ecosystems; 68 per cent of the country's total forestry resources are considered productive and as having economic potential.

Honduras is one of the relatively least-developed countries in the , with a per capita GDP of US$540 in 1990; 41 per cent of the population over fifteen years of age are illiterate; 37 per cent of children under five suffer from some degree of malnutrition; the infant mortality rate is 58 per 1000 live births; and 221 mothers die in childbirth for every 100,000 births. It is estimated that 56 per cent of households are below the poverty line, and as many as 68 per cent in rural areas; 34 per cent of dwellings do not have drinking water and 45 per cent lack sewage services.

In 1990, the population of Honduras was estimated at 4.7 million, with an annual growth rate of 2.8 per cent, and was primarily concentrated in rural areas, where six out of ten inhabitants live. In recent years the urban population has grown more rapidly, primarily because of migration from the countryside. Population density is uneven, with departments where it is below three inhabitants per km. contrasting with departments where it is over 100. Average density for the whole country is about forty inhabitants per km. .

This chapter describes, in the context of the 1980s, the structure and performance of the Honduran economy, the importance of foreign trade and the impact of external debt. It also includes a detailed analysis of the elements of the Structural Adjustment Programme launched in March 1990 and an evaluation of its results as at December 1991.

1.2 Structure and performance of the Honduran economy

Honduras has an open economy: in the period 1989-1991 the sum of exports and imports of goods represented an average of 56 per cent of the gross domestic product. The majority of exports are agricultural products, primarily and . The chief imports are raw materials and building materials, consumer goods, capital goods and to a lesser extent fuels and lubricants. L/7028 Page 7

A breakdown of GDP by branch of activity shows that is the most important sector of the Honduran economy (see Table 1), employing over 50 per cent of the labour force and generating 25.2 per cent of the gross domestic product. The main products are bananas, coffee and produce for: domestic consumption, primarily staple grains (, kidney and rice).

The exportable supply of the sector consists primarily of bananas, coffee, and lobsters, cattle, and ; in total these generate 61 per cent of the gross value of the sector's production and 80 per cent of exports of goods.

In the 1980s, the sector performed unevenly, with sharp drops in the early years, basically owing to the world economic that depressed coffee and banana prices. In the second half of the decade there were significant recoveries, primarily attributable to better world coffee prices and higher banana production. The average growth rate for the sector during the decade was 2.9 per cent.

The industrial sector (including construction) accounts for 20 per cent of GDP, and employs roughly 16 per cent of the labour force. Production consists primarily of goods for domestic consumption. The biggest industry is the food and beverages industry, which generates about a third of value added and accounts for 25 per cent of industrial employment.

Food production concerns primarily dairy products, oils, flour and . It is estimated that the consumer goods industry accounts for 72 per cent of value added and 81.3 per cent of employment in the sector, followed in importance by intermediate goods and the metal manufactures and engineering industry. The production structure of this sector is the result of an import substitution strategy launched in the 1950s and aimed at production for the domestic and Central American markets. Nevertheless, the country has a large export potential in the manufacturing branches that are natural-resource and labour-intensive, such as food, products and made-up textile products.

In recent years growth in the industrial sector has been in line with the GDP growth rate, and hence its share of the total product has remained virtually stable, with a slight decline at the end of the decade primarily owing to problems in the obtention of foreign exchange, which is vital for the sector since it is a net importer of inputs and capital goods. Hence, its performance is closely linked with prevailing trends and conditions in the export sector, through foreign-exchange earnings and the stimulation of domestic demand. L/7028 Page 8

The services sector represents 35.8 per cent of the gross domestic product and employs a little over 30 per cent of the labour force. Trade is the most important activity in this sector, followed in importance by personal services, public administration and financial services.

Honduras has made great efforts to improve and expand the infrastructure supporting the production sector. As far as transport is concerned, the country now has a relatively developed primary and secondary network. Airport and port facilities have also been substantially improved.

In the electricity sub-sector, installed capacity is 536 MW, of which 73 per cent is generated by hydro-electric power stations and the rest by thermal power stations; nevertheless, electrification is predominately urban, and only an estimated 20 per cent of rural areas have access to this service.

In the telecommunication sub-sector, the installations of the country's main towns and cities have been renewed and modernized, and there are rapid communication services via satellite and fax with the rest of the world.

As far as financial services are concerned, the banking system includes fourteen commercial banks, two development banks, two development finance institutions and six savings and loan associations. Of these institutions, the first-named hold 91 per cent of the system's assets and deposits. At present, the country has a wide-ranging banking network of more than 350 branch offices spread throughout the territory, which provide a very wide range of services and constitute a dynamic factor for development. Bank credit to the rest of the economy in 1991 amounted to 5,468.9 million lempiras (L 5.400 = US$1.00) of which 78 per cent consisted of financing for the private sector.

The Honduras Stock Market was established in 1990 with a view to developing the capital market by transforming short-term resources into long-term resources, thus channelling savings and investment for the benefit of all sectors. The organizational and operational structure of the Honduras Stock Market was designed with the characteristics of a modern stock exchange adapted to the Honduran financial system, but ready for the changes and development desired for the capital market. By December 1991 a total of thirty companies engaged in a very wide range of economic activities were listed, and trading had amounted to> L 55.3 million in 105 transactions involving bonds, notes and inter-market trading.

Finally, activity consists primarily of production of three products, , lead and zinc, and accounts for roughly 1.4 per cent of GDP and 5.2 per cent of total exports of goods. During the 1980s, the L/7028 Page 9 sector's performance depended on world price trends, and over the decade as a whole its average growth rate amounted to 1.9 per cent, as a result of the slump in mining activity during the second half of the decade which contrasted with an annual growth rate of production of 7.2 per cent in the first half.

1.3 Foreign trade, balance of payments and external debt

1.3.1 Foreign trade

Honduran exports of goods consist basically of traditional agricultural products and to a lesser extent minerals and industrial goods. The most important export products are bananas, coffee, shrimp, lobsters-,, minerals, wood, sugar and tobacco; of these, the first two accounted for 64 per cent of total exports of goods in 1991. The share of services in total exports has remained at about 15 per cent in recent years, of which travel and transport represented about 70 per cent.

During the 1980s, total exports grew at an average rate of 0.7 per cent. Annual variations show an unsteady trend, with negative rates in 1981-1982 and positive growth rates from 1983 to 1986. In 1987, exports shrank as a result of the drop in coffee prices following the breakdown of the international coffee agreement, and lower exports of minerals as a result of the partial interruption of production. In 1988 and 1989 exports again improved, with a 3 per cent growth rate.

In 1990 exports fell by 3.5 per cent over the previous year as a consequence of lower mineral exports and a sharp fall in world coffee prices, and despite the change in the relative prices of tradeable and non-tradeable goods resulting from the modification of the exchange régime, tariff reform and other deregulation measures introduced with the implementation of the adjustment programme launched in March of that year. In 1991, there was a large drop in the volume and price of coffee exports as well as in the volume of banana exports, which together led to a decline of US$50 million in exports compared with 1990.

With regard to imports, payments for services have shown the largest increase in share of the total, rising from 26 per cent in 1980 to 36 per cent in 1989. As regards imports of goods, consumer goods have increased their share, energy imports do not show a clear trend, and raw materials and construction materials have remained practically constant. In overall terms, during this decade the value of imports of goods and services has remained constant. L/7028 Page 10

A more detailed analysis shows that in 1980 imports of goods and services increased sharply, by 21 per cent over the previous year, leading to a serious deterioration of the current account and consequent loss of international reserves. As a result, stricter exchange controls were introduced in 1981, when a list of essential goods for the grant of foreign exchange was established, leading to a 16 per cent drop in imports in 1982 and a reduction of the trade deficit, although the loss of international reserves continued owing to the heavy burden of external debt service.

During the following years the essential goods system was made more flexible, with the introduction of self-financing systems for imports, and the authorization for exporters to other Central American countries to sell foreign exchange in order to finance imports from the area, which led to an increase in imports of 17 per cent in 1984. However, in the remaining years of the decade, with the exception of 1988, the value of imports shrank as the measures regulating access to foreign exchange were strengthened and also with the introduction of a system whereby exporters could liquidate a percentage of their export earnings at an exchange rate reflecting the unofficial market rate. This mechanism was called the Transferable Certificate of Option on Foreign-Exchange Earnings from Exports (CETRA) and had the effect of promoting exports and stimulating the repatriation of export earnings.

In 1990 imports of goods increased by 4 per cent compared with 1989, with a large rise in the value of imports of fuels and electrical machinery and equipment. This is explained by higher oil prices, the expectation of future devaluations that would lead to higher prices, and a lowering of import tariffs, which together more than made up for the devaluations carried out during the year. In the following year, imports decelerated, falling by 2 per cent.

With regard to the structure of Honduran foreign trade, the country's major trading partner has been the , which is the destination of the majority of its exports, 51.5 per cent on average during the 1980s. In order of importance for exports the United States is followed by the European countries, accounting for 31 per cent, led by . On the import side, the main supplier is the United States, with 39.7 per cent of average total value in the 1980s, while Europe, primarily the and Germany, accounted for 16.3 per cent. The Central American countries provided 9.2 per cent, followed by Japan and Venezuela, with 8.3 and 6.9 per cent, respectively (see Figures la and lb). L/7028 Page 11 Figure No. la

HONDURAS Exports by Destination Rest of World (1.0%i_ Rest of America (4.2^J Central America (4.8%), Japan (5.5%)

United States (51.5%)

Europe (31.8%)

Source: Based on data of the .

Figure No. lb

HONDURAS Imports by Origin Rest of World (3.7%) Japan (8.3%)

Central America (9.2%)

United States Europe (16.3% (39.7%)

Rest of America (22.7%)

Source: Based on data of the Central Bank of Honduras. L/7028 Page 12

1.3.2. Balance of Payments

At the outset of the 1980s the balance-of-payments current-account deficits stemming from the chronic trade deficit and heavy debt servicing were offset by a considerable inflow of capital to finance a high level of public investment, particularly in infrastructure. However, in the period 1985-1989 this inflow of capital dwindled so that the sole balancing element for the balance-of-payments deficit was external official transfers, primarily from the United States. In addition, over the decade as a whole the real exchange rate appreciated steadily (see figure 2), which discouraged exports and encouraged imports, thus further aggravating the situation of the external sector of the economy.

In 1990, the balance of goods and services deteriorated sharply compared with the previous year, but this was offset by higher external transfers with the result that the balance of payments even showed an increase in international reserves. In 1991 the current account deficit continued to grow, but higher inflows of official and private capital caused international reserves to rise for the second year running (see table 2).

Figure No. 2

HONDURAS: Bilateral Real Exchange Rate (1970-1989) /-VV) » u • v\ ' ' • \ I.M - \ \ > - ^A^ 1 !»•- v^A I.I - \ p

it •• " II Itfft llll •«•»

• TCR

Source: Based on data of the International Monetary Fund, International Financial Statistics: Yearbook 1991. L/7028 Page 13

1.3.3 External debt

External financial resources in the form of loans increased rapidly during the decade 1980-89, with the result that the total debt rose from US$1,388.0 million to US$3,253.7 million over that period (see Tables 3A and 3B). However, this pronounced upward trend in the Honduran external debt had been continuing since the 1970s, when large-scale private investment projects were undertaken, as well as public investment in roads, ports, energy and telecommunications. The largest part of this external debt was with multilateral bodies, representing 55.2 per cent of the total in 1991, followed by bilateral and commercial debt, with 37.2 per cent and 7.5 per cent, respectively.

External public debt servicing commitments increased considerably during the 1980s as a consequence of the rising debt incurred in the early years and the upward movement in world interest rates. But it was in the second half of the decade that debt servicing increased significantly, with the expiry of the grace periods granted by international finance bodies: it rose from 16 per cent of exports in 1985 to 22 per cent in 1987, then falling to 12 per cent in 1989 owing to arrears incurred in debt service..

With the implementation of the adjustment programme (see Section 1.4»), during the first half of 1990, negotiations were conducted with multilateral finance institutions with a view not only to reviving loan disbursements suspended by those institutions but also to laying the foundations for what would be a new financing programme. As a result of these negotiations, in June a bridging loan of US$147.3 million was obtained from the United States Treasury Department, the Government of Venezuela and the Government of , which together with disbursements by the Government of Japan, USAID and a counterpart from the Government of Honduras, amounted to total financing of US$245.7 million.

With these resources the Government was able to pay off its arrears with multilateral bodies in the payment of debt due, so that it was once again eligible for fresh credits, opening the way for new international financial flows. Thus, in July 1990 the IMF approved a stand-by arrangement for a twelve-month period. Subsequently, the IBRD and IDB approved a structural adjustment loan and an agricultural sectoral credit, respectively. In December 1991 external loan disbursements to support the adjustment programme amounted to US$228 million. L/7028 Page 14

In September 1990, with the backing of the negotiations with the multilateral finance institutions, Honduras requested a refinancing of its external debt with eleven bilateral creditors of the , and achieved a refinancing agreement for US$292.5 million . This amount included the totality of the principal and interest on official loans due and not paid as at 31 August 1990 and the total of the principal and interest falling due during the consolidation period, which ran from September 1990 to July 1991; the period was subsequently extended until February 1992. With this extension, the total amount refunded under these terms amounts to about US$345 million.

Another major event as regards external debt was the forgiveness by the United States, and the Netherlands, in 1991, and the United Kingdom in 1992, of a total of US$452.1 million of debt. Of this total, credits from the United States Government, and loans from the International Development Agency and under Public Law PL-480, accounted for US$433.6 million; the Swiss Government, US$10.7 million; the Dutch Government. US$2.8 million; and the British Government, US$5 million. These cancellations represented a reduction of 25 per cent in public bilateral debt in 1991 compared with the total in 1990, and the total public external debt was reduced by 11 per cent, from US$2,818.8 million in 1990 to US$2,516.6 million in 1991.

With respect to commercial bank debt, the initial amount of USS227.2 million at the end of 1982 has been reduced to US$63.4 million in Feoruary 1992. This sipnificant reduction was achieved through debt conversion and privatization programmes, local currency settlement arrangements and the swapping of debt instruments for services.

1.4 The Structural Adjustment Programme launched in March 1990 and its results

In the 1970s, the Honduran real gross domestic product grew at an average rate or 4.5 per cent, driven by public and private investment expenditure financed by ever-increasing amounts of external resources. In the 1980s, the main economic variables deteriorated considerably, partly as a result of the decline in the terms of trade, the rising external debt service and the socio-political instability prevailing in the region. Hovever, the performance over the decade was the result not only of adverse external factor? but also of the development strategy adopted.

The debt cancellation by the Government of the United States subsequently reduced the consolidated total by US$17.2 million. L/7028 Page 15

On 27 January 1990, Rafael Leonardo Callejas became . The new government recognized the structural weaknesses of the economy and the need to take immediate action to deal with the economic crisis, and therefore drew up and implemented Decree-Law No. 18-90, "Law on the Structural Reorganization of the Economy". The programme consists essentially of price liberalization measures and trade, exchange and fiscal measures, a reduction of the fiscal deficit being an important component.

To encourage a realistic reallocation of resources, a price liberalization process was launched, with a rise of 33 per cent and 64 per cent in the price of petrol (gasoline) and diesel, respectively, so as to bring them into line with world prices. The system of guarantee prices for State purchases of staple grains was abolished, and the gradual reduction of price controls was begun: in March 1990 such controls covered twenty-eight products, compared with only six products today, namely coffee, cement, iron bars, petroleum products, fertilizers and airline tickets.

With regard to trade policy, the process of modernization of the tariff and customs system was continued; in the foreign-exchange field, the exchange rate was modified, and the resolutions creating the system of CETRAs (Transferable Certificates of Options on Foreign-Exchange Earnings from Exports) were repealed and an inter-bank foreign exchange market was authorized, to be based on foreign-exchange supply and demand. With respect to tax policy, the tax structure was modified, with the introduction of income tax and sales tax. With respect to public spending, the budget for 1990 was 10 per cent lower than that for 1989.

After two years of existence, the adjustment programme has produced results which show that the economy has stabilized, as described below. After growing by barely 0.1 per cent in 1990 (see Figure 3 and Table 4), real output in 1990 increased by 2 per cent, which was still too little to avoid a drop in per capita income. The sectors showing significant improvement were agriculture, mining, construction, trade and financial services. On the expenditure side, the drop in public consumption was offset by the rise in investment, both public and private, which together increased by 16 per cent after falling by 8.5 per cent in 1990. L/7028 Page 16

Figure No. 3

Source: Based on data of the Central Bank of Honduras.

As far as the external sector is concerned, the positive effect of the change in relative prices between tradeable and non-tradeable goods as a result of the modification of the exchange rate and tariff reform was outstripped in 1991 by the drop in both volume and price of coffee exports, the country's second biggest export product, and the decline in the volume of banana exports: the value of these two export items together declined by US$50 million compared with 1990. Hence, the deficit in the balance of goods and services remained at US$346 million, which together with a decline in transfers from abroad increased the current account deficit by US$105 million. However, larger inflows of official and private capital raised international reserves by US$56 million at December 1990 and US$90 million in 1991.

Domestic prices tended to stabilize as from the second half of 1991, with a growth rate of 21.4 per cent over the year, following the surge of 36.4 per cent in 1990, measured from year end to year end (see figure 4). L/7028 Page 17 Figure No. 4

Source: Based on data of the Central Bank, of Honduras.

On the monetary side, the squeeze on internal credit for the public sector in 1990 and 1991 enabled private sector loans to expand by 12.5 per cent and 10 per cent respectively, rising to L 4,293 million. Banking system deposits rose by L 685 million in 1991; notes and coin grew by 10 per cent, and the total money supply by 14.6 per cent, which was less than the 21.4 per cent rise in domestic prices.

The tight monetary policy was a major factor in the stabilization of the exchange rate, and enabled the official rate to be maintained at L 5.40 for US$1.00 at December 1991, barely 5.5 per cent over the free market rate.

On the fiscal front, implementation of the measures contained in Decree No. 18-90 led to a considerable rise in current receipts, which rose by 34 per cent and 38 per cent in 1990 and 1991, respectively; together with the lower capital spending, this offset the higher level of current expenditure. The result was a reduction of the central government net budget deficit to 3 per cent of GDP in 1991, compared with 7.2 per cent and 7.7 per cent in 1989 and 1990, respectively.

With respect to external debt, the implementation of the adjustment programme has led to restored credibility in international financial circles, renewed eligibility for fresh credits, rescheduling of the bilateral debt for US$345 million; forgiveness of official debt for the amount of US$452 million, and significant reductions in private debt. L/7028 Page 18

II. TRADE POLICY REGIME; FRAMEWORK AND OBJECTIVES

2.1 Introduction

Owing to the openness of the Honduran economy, its performance is closely linked with foreign trade policies. It is therefore important to know the objectives of the trade policy régime and the framework in which it is formulated. This Chapter outlines the institutional framework, structure and participants in the formulation of trade policy, as well as the foreign trade objectives set out in the Adjustment Programme of March 1990.

2.2 Institutional framework

Under its Constitution, Honduras is a State of law constituted as a free and democratic republic in which sovereignty is vested in the people, from whom the powers of the State exercised by representation emanate. The Constitution also establishes that the country's economic system is based on tne principles of efficiency of production, social justice in the distribution of wealth and income, and harmonious co-existence of the factors of production that dignify labour and contribute to the fulfilment of the Honduran people.

Executive power is exercised by the President of the Republic, who is elected directly by simple majority of votes for a four-year term, with the support of a Cabinet consisting of twelve Secretaries of State.

Legislative power is exercised by a Congress of Deputies who are directly elected for a period of four years, on the basis of one deputy and one alternate for every 35,000 inhabitants or fraction over 15,000. Its main functions are the creation, revision and repeal of laws; approval or denunciation of international treaties; annual approval of the budget; and creation or abolition of customs and free zones, inter alia.

The Judicial Power comprises the Supreme Court of Justice, courts of appeal and courts of first instance. The Supreme Court consists of nine Magistrates and seven alternates appointed by the National Congress. It has the power to judge and to enforce judgements.

2.3 Structure of trade policy formulation

The Constitution establishes that the State shall determine its external economic relations on a basis of just international co-operation, regional integration, and compliance with the treaties and conventions it signs. Hence, trade treaties or agreements need to be approved by the National Congress and ratified by the Executive Power. L/7028 Page 19

The highest forum of economic policy decision-making is the Economic Cabinet, chaired by the President of the Republic. Its members are the Secretaries of the Economy and Trade, Finance and Public Credit, Natural Resources, Planning, Co-ordination and Budget, and the President of the Central Bank of Honduras; the Secretary of Communications, Public Works and Transport is invited on a standing basis.

Formulation, design and execution of trade policy is the responsibility of the Ministry of the Economy and Trade with the active participation of other State and private sector organizations involved in international trade. The main official entities that participate in the formulation of trade policy are:

Ministry of the Economy and Trade: determines and administers national economic policy on both domestic and external trade, and supervises compliance with international economic and financial treaties and agreements.

Ministry of Finance and Public Credit: responsible for the design and implementation of fiscal policy. Its responsibilities include the preparation of the preliminary draft of the General Budget of Income and Expenditure, administration and regulation of the customs system, and the contracting and management of external public debt, to which end it co-ordinates its activities with those of other bodies involved in the design and management of external and internal economic policy.

Central Bank of Honduras: the objectives of this institution are to promote the monetary, credit and exchange conditions that are most favourable for the country's economic development; to that end it is responsible for monetary issue, exchange, credit and securities. It also acts as the banker, fiscal agent and economic and financial adviser of the State, and as its representative to the International Monetary Fund and other multilateral bodies.

Ministry of Planning, Co-ordination and Budget: responsible for the planning, implementation, co-ordination and evaluation of measures aimed at bringing about the country's economic and social development. Its chief activities include: the carrying out of economic and social studies with a view to making recommendations to the President on development strategies; the analysis, ranking, elaboration and follow up of investment programmes and projects; the analysis and channelling of technical and financial foreign co-operation; and the co-ordination of development plans with other State institutions.

Ministry of Natural Resources: responsible for management and co-ordination at the highest level of the agricultural and public sector; through this ministry the State formulates and follows up the implementation of the development policies for agricultural and forestry L/7028 Page 20 activities carried out by the specialized administrative bodies. To that end, it is responsible for determining and implementing the budget programming, co-ordination, supervision and follow-up of activities in this sector in accordance with the Government's overall policies and strategies.

Ministry of External Relations: responsible for the planning and implementation of activities relating to the country's foreign policy, hence its work is connected with the formulation and implementation of trade policies, the process of Central American integration, and in general trade relations with other countries.

Finally, with regard to the private sector, the main institutions that participate in the design of external trade policy are the business federations, chambers of commerce, industrial associations, exporters' federations and other private organizations that support the exporting sector.

2.4 The new trade policy

Until the mid-1980s, the development strategy followed by the Honduran authorities was based on import substitution supported by protectionist measures and broad government intervention. The economic reform programme launched in 1990 is aimed at achieving a better participation in world trade and more efficient, diversified and competitive domestic production. Hence, the aim is to make use of comparative advantages and the opening of new markets and to strengthen trade relations with the rest of the world.

To achieve these objectives, the Government implemented major measures such as the adoption of a transparent exchange policy, in order to maintain an effective real exchange rate in line with market conditions, and policies aimed at greater liberalization of international trade, with a view to the elimination of all kinds of distortions and obstacles to fluid trade, thus eliminating the anti-export bias in the economy. In addition, it has strengthened Honduras' participation in the new Central American economic integration process, promoting trade relations with other economic groups and countries outside the region.

This trade liberalization strategy is carried out in conjunction with macroeconomic policies aimed at increasing the efficiency of the economy. Chief among these are the overhauling of public finance, increasing receipts and containing expenditure; more realistic .interest rates and sectoral policies designed to eliminate distortions in internal prices; and transfer of State activities to the private sector, under the approach that private initiative is the main engine of development and economic growth. L/7028 Page 21

III. EXPORT POLICY

3.1 Introduction

In the framework of the new economic policy adopted by the Government, development of exports plays a key rôle for the success of the overall economic strategy. This chapter gives details of the legal requirements and procedures governing export operations, the taxes and charges levied on them and the system of incentives for them. In addition it describes the technical assistance provided by private institutions, international organizations and friendly countries to develop them.

3.2 Legal provisions

In order to carry out an export operation a number of requirements must be fulfilled, which vary depending on the nature of the export in question. In the case of animal products or by-products, the exporter has to apply for an export permit from the Ministry of Natural Resources, the issuing of which will depend upon whether the operation satisfies the Ministry's sanitary or wildlife protection requirements. The Ministry also lays down the requirements for exports of vegetable materials, plants or vegetable products of all kinds, and issues the corresponding phytosanitary certificate if the requirements are met.

Food products must, prior to export, satisfy the requirements laid down by the Food Control Division of the Ministry of Public Health. These requirements prohibit the export of any food that is contaminated, adulterated, falsified or presumed harmful to health.

In general, a natural or legal person wishing to carry out an export operation must also submit an Export Declaration and a commercial invoice concerned to the Central Bank of Honduras. The above-mentioned export formalities are carried out at the Export Processing Centre (CENTREX) of the Ministry of the Economy and Trade, where the institutions concerned have their delegated officials.

The Export Declaration must include the quantity, value and destination of the goods to be exported, as well as the probable date of export and the currency in which the corresponding payment will be received. The above provision does not apply to exports of goods originating in the Free Zones, Industrial Processing Zones for Export Trade (ZIP), small exports and the operations of inward-processing enterprises, in accordance with the Regulations of the Law on Foreign-Exchange Receipts from Exports (see Annexes). L/7028 Page 22

3.3 Export taxes and charges

In Honduras, exports of goods are subject to a 1 per cent levy on their f.o.b. value. This does not apply to a group of so-called traditional products, which are subject to other ad valorem, specific or additional levies, namely: coffee, bananas, minerals (silver, lead and zinc), marine products, cattle, swine and live poultry, , sugar and wood (see Table 5 and Customs Tariff and Decrees amending the Tariff, in the Annexes).

3.4 System of export incentives

3.4.1 Export promotion

The Law on Export Promotion enacted in 1987 established various mechanisms to encourage exports, including the Export Processing Centre (CENTREX) designed to streamline and simplify export formalities. The Adjustment Programme of March 1992 repealed the Export Promotion Act, leaving only the CENTREX in existence. It also initiated the revision of the legal framework of the economy and implemented a number of trade, exchange and fiscal measures aimed at reducing balance-of-payments difficulties, generating an inflow of financial resources and encouraging efficiency and competitiveness of domestic production to replace imports and generate exports. The aim is thus to ensure that resources go to activities where there are comparative advantages or competitive positions that can be developed at international level.

3.4.2 Export promotion customs régimes

The Honduras Customs Law, which was amended on 14 December 1987 (see Annexes), contains the following mechanisms that provide special treatment to promote exports :

Re-export: This is one of the temporary régimes, and allows goods previously imported temporarily or definitively to leave the customs territory of the country exempt from export duties, in the same state as when they were introduced into the country or following additional processing which has not substantially affected their nature.

Inward-processing régime: These régimes allow the suspension, exemption or refund of customs duties relating to goods introduced into the country's customs territory with a view to being modified or incorporated into products which have been previously or which are subsequently re-exported. They are as follows:

These mechanisms are part of the customs régimes established by the Customs Act which are analysed in Chapter IV. L/7028 Page 23

(a) Temporary admission: This authorizes the introduction of goods with suspension of repayment of duties, for modification or processing and subsequent re-export;

(b) Duty-free replacement: This authorizes the duty-free import of specific goods to compensate for other identical or equivalent goods incorporated into previously exported products;

(c) Drawback system: This provides for total or partial reimbursement of duties paid on imports of goods when such goods or other equivalent goods are re-exported after being processed or incorporated into export products.

Free zones: The law establishing free zones authorizes the establishment of domestic and foreign commercial and industrial enterprises engaged in exporting and related or complementary activities. They may introduce machinery and equipment, raw materials, production accessories, packaging and samples free of customs duties, internal consumption taxes and other levies. They may also freely export and re-export finished or semi-finished goods and freely change foreign currency, and they are also exempt from payment of income tax and sales tax.

There are currently seven free zones in the country, the first of which was created in Puerto Cortés in 1977, and the second in the city of in 1989; the remainder, which have not yet come into operation, are located in the cities of , Omoa, Choloma and Amapala. The investment thus attracted comes primarily from the United States and is concentrated in the made-up textile articles industry.

3.4.3 Temporary Import Régime (RIT)

This mechanism was established in order to promote exports, develop employment and take advantage of the benefits of the United States Carribean Basin Economic Recovery Act.

The incentives provided by this law include the suspension of payment of customs duties, consular fees, customs service fees and all other taxes, including sales tax on imports of raw materials and intermediate products necessary for the production of export goods. In addition, the profits from exports under this régime are entirely exempt from income tax for a ten-year period.

Both this régime and the Industrial Processing Zones for Export Trade are included in the legal framework provided by the Temporary Admission Régime of the Honduras Customs Act. L/7028 Page 24

3.4.A Industrial Processing Zones for Export Trade (ZIP)

The Industrial Processing Zones for Export Trade are privately owned and managed geographical areas, which were created in order to develop labour-intensive service and manufacturing industry exclusively for export.

The goods and merchandise imported or exported are entirely exempt from payment of customs duties, consular fees, charges and surcharges, internal consumption taxes, sales, production and other taxes, levies, surtaxes and municipal taxes. In addition, the profits obtained by enterprises in ZIPs are exempt from payment of income tax.

There are seven ZIPs in the country, all in the north, the first of which was set up in January 1990. The investment thus attracted comes from a number of countries, particularly the United States, Korea and .

3.4.5 Banana export incentives

In order to encourage banana exports, in April 1987 a system of incentives was established, under which export taxes are waived for surpluses in excess of a base level of 38.5 million boxes of bananas exported by all marketing groups together. This incentive will last for six years, and its benefits will operate to improve the plantations and facilities of banana companies.

In May 1991, by Decree 57-91 the Law on Incentives to Banana Production was enacted with a view to encouraging the growth and development of banana production, the incorporation of new areas, the improvement of existing areas and the exploitation of new marketing opportunities at world level.

The benefits granted include exemption from payment of export taxes during the first three years in the case of exports from new areas cultivated after the Act came into force. From the fourth to the sixth year inclusive, production from these new areas will pay the equivalent of 40 per cent of the tax normally paid for each box exported.

In the case of banana exports from areas entirely rehabilitated by the producer as a consequence of natural disasters, for the first three years each box exported will pay an export tax equivalent to 50 per cent of the full tax, and will pay the full amount of the tax as from the fourth year.

3.4.6 Technical assistance

Various national and international institutions provide technical assistance in many fields for Honduran or foreign enterprises engaged in exporting goods, including the following: L/7028 Page 25

Federation of Agricultural and Agro-Industrial Producers and Exporters Associations of Honduras (FPX)

This Federation is responsible for helping producers to find markets, identifying joint investment projects and processing export and investment formalities. It also seeks to support specific projects, by helping them to achieve levels of productivity that would favour and allow industrialization and the successful export of agro-industrial products. It also provides advice on the preparation, evaluation and follow-up of projects, and co-operation in the formulation and negotiation of finance applications.

Honduran Agricultural Research Foundation (FHIA)

This is a private non-profit-making organization devoted to agricultural research, particularly on traditional and non-traditional export and their diversification. It has various research programmes which are supported by scientists who are specialists in different fields.

Export Investment and Development Foundation (FIDE)

FIDE is a private institution whose aim is to stimulate national and foreign private investment and increase exports of non-traditional goods, by providing support in the field of technical assistance relating to production, marketing, administration and finance.

To provide advice on production, management and financial aspects, this organization recruits experts to assist enterprises. In the marketing field, it has representative offices in the United States and up-to-date international information on export market conditions and trends.

International co-operation

There are international co-operation programmes to support the country in developing and promoting its exports. This type of assistance is aimed at fostering private or public institutions involved in export promotion with a view to encouraging production, marketing and development of export products and the training of local personnel in promotion and trade practices. These programmes are carried out inter alia by the United States, the European Economic Community and various United Nations affiliated agencies. L/7028 Page 26

IV. IMPORT POLICY

4.1 Introduction

The import substitution policy gave rise to a set of measures aimed at promoting, protecting and stimulating local production; in extreme cases they represented levels of effective protection of as much as 200 per cent, and developed a system of surtaxes, exemptions and tax concessions that were highly discretionary.

Until March 1990, all importers had to apply for an import permit and the allocation of the corresponding foreign exchange to the Central Bank of Honduras. The decision on the granting of foreign exchange was based on a list of essential goods which ranked imports in the following order: essential consumer goods; medicine and didactic materials; fuels and lubricants; raw materials for agriculture and industrial inputs; machinery and equipment; spare parts and other essential goods.

With the implementation of the Adjustment Programme, the Import Permit was eliminated, while an Import Register was maintained for statistical purposes, and the criteria for foreign exchange allocation were also abolished. The legal régime for imports was simplified; the Customs Tariff has been progressively reduced and made more transparent, and the distortions created by the system of exemptions and tax concessions have been removed.

This chapter outlines the provisions governing imports, the tariff régime and other import charges, and customs rules and procedures.

4.2 Legal provisions

The Honduran Import Tariff is based on the Customs Co-operation Council Nomenclature (CCCN) which was adopted in 1988 and replaced the Central American Uniform Customs Nomenclature (NAUCA), whose classification of goods had become inadequate for the scale of international trade transactions and used a mixed tariff system combined with specific and ad valorem tariffs. With the adoption of the CCCN the specific levies were abolished and only the ad valorem duties were retained, and the range of products specified in the Customs Tariff was considerably enlarged, so that it could match the needs of diversification and modernization stemming from the development of international trade. The current Import Tariff includes duties, surcharges and exemptions, and the application of the selective consumption tax where appropriate. It is planned to replace the CCCN by the Harmonized System nomenclature, which is widely applied, on 1 January 1993.

The duties contained in the Import Tariff may be modified by the National Congress, after receiving the opinion accompanied by an L/7028 Page 27 explanatory statement of reasons, of the Executive Power, via the Ministries of Finance and Public Credit and of the Economy and Trade. The purpose of such modification may be to provide adequate protection for local production, guarantee domestic supply, promote new production activities, and also for international negotiations with other countries. The Ministry of Finance and Public Credit, through the Directorate-General of Customs, is also responsible for ensuring compliance with customs and tariff provisions, and for proposing the creation, modification or abolition of customs offices, and deciding on their location and territorial jurisdiction.

Imports of products of vegetable or animal origin must meet sanitary conditions, which are guaranteed and covered by a Phytosanitary Permit that must be applied for from the Ministry of Natural Resources in accordance with the Law on Plant Health and the Health Regulations for the Import and Export of Animals, and Animal Products and By-products. Such imports must also be accompanied by a similar permit issued by the corresponding authorities of the country of origin. The Ministry may, if it sees fit, submit imports to periods of quarantine, and also authorize, restrict or prohibit imports of plants or animals and their products and by-products.

When they are considered harmful to health, imports are regulated by the Ministry of Public Health in accordance with the Health Code. In the case of food, the registration requirements and provisions established for domestically-produced foods as regards residual content of chemicals and physical elements permitted in water, food and beverages for human consumption, as well as content of flavour enhancers, colouring matters and preservatives etc., must be satisfied.

The Law on Contraband and Tax Fraud provides penalties for these trade practices. This legislation is currently being revised in order to update it and bring it into line with the modernization of the State, and thus counter tax fraud, contraband and unfair trade practices which cause or threaten injury to domestic production. In the context of the integration process, draft regulations have been drawn up on origin of goods, unfair business practices and safeguard action, which reflect the GATT rules on these matters.

With respect to procurement abroad by the Public Sector, a tender mechanism is followed in accordance with the criteria laid down by the Law on Government Procurement (see Annexes). Apart from the provisions of this law, government procurement must also comply with, as appropriate, the guidelines laid down by the General Budget of Income and Expenditure of the Republic, the Law on Administrative Procedures and the General Regulations Governing Procurement, Supplies and Surplus and Other Goods. The General Supply Office of the Republic is responsible for managing the procurement L/7028 Page 28 of the Centralized Public Administration. With regard to the Decentralized Public Administration, and in accordance with its competence, each entity is responsible for its own procurement under the supervision of the Ministry of Finance and Public Credit.

4.3 Characteristics of the tariff régime

The Honduran tariff régime has been an instrument for the protection of import-substitution industry, through high import tariffs that led to levels of effective protection of as much as 200 per cent in extreme cases. In addition there were surtaxes and a system of exemptions and tariff reductions that made the system rather untransparent.

In March 1990 a process of tariff reform was launched, which included the reduction of tariffs, with a tariff ceiling of 20 per cent and floor of 5 per cent established over a three-year period, as indicated below:

Tariffs From 12 Mapch 19g0 From L January 1991 r m ad valorem c.i.f. ,, rw-mhor IQCM tn n rwomh»r IQQI ^ ° 1 January 1992 in March 1990 tnto 31 December 1990 to 31 December 1991

45 and over 40 35 20 From 30 to 44 30 25 20 From 16 to 29 15 15 15 From 10 to 15 10 10 10 Less than 10 2 4 5

The progressive reductions are aimed at harmonizing the tariff with the objectives of liberalization and transparency pursued by the new economic policy, by stripping it of fiscal functions or a rôle in the protection of the balance-of-payments, promoting competition and applying acceptable levels of effective protection. The new import duties are based on the importance of goods for the production system: lower tariffs are set for raw materials and machinery not produced in the country, and the higher tariffs for goods that can be produced locally; this category includes textiles, starch, fresh , alcoholic beverages and electrical household appliances.

In line with the tariff reductions, the distortions generated by the system of duty exemptions were eliminated by the repeal of all legal provisions exempting public or private institutions and natural legal persons, with the exception of those established by the constitution and by international agreements, thus promoting competition among all production sectors on an equal footing. L/7028 Page 29

Finally, with respect to tariffs on imports of basic agricultural products, a harmonized price band mechanism has been designed at the Central American level. This is designed as an instrument to reduce the effect of severe fluctuations in world prices on domestic markets. This mechanism works through a modification of the tariff to offset variations with respect to a minimum or maximum international price established by the band.

4.4 Other import levies

In addition to the duties in the import tariff, Honduran imports are subject to the following surcharges and taxes.

4.4.1 Surtaxes

The Law on the Structural Re-Organization of the Economy of March 1990 repealed most of the surtaxes then in force, such as the 8-per-cent consular stamp tax, the 12-per-cent levy on non-equalized duties, the 5-per-cent levy on c.i.f. value of imports of machinery, equipment and inputs and the 20-per-cent levy ad valorem c.i.f. on all imports. At present only two additional levies are currently applied, as follows:

Ten per cent surtax: This surcharge is calculated on the c.i.f. value of all imports with the exception of raw materials, inputs and capital goods included in a list of exempted products; imports from Central America under the Multilateral Free Trade Agreement are also exempted. This surtax is scheduled to be eliminated in January 1993.

Customs administrative services: Under this heading a 5-per-cent levy is applied to the c.i.f. value of all imported goods with the exception of procurement by the government, municipalities and other autonomous entities; enterprises covered by the Law on Intellectual Expression; officially authorized donations, agricultural inputs, medicine and raw materials for medicaments, and computers and their accessories.

4.4.2 Selective consumption tax

This tax is applied at a rate of 10 per cent at a single stage of marketing to both domestic products and imports. Its purpose is the rationalization of consumption of goods that are not considered essential products. It is calculated on the basis of the value resulting from the application of import duties, with 15 per cent imputed profit added to the c.i.f. value of the goods. This tax is applied to: aquarium fish, certain alcoholic beverages, perfumes, jewels, electric toys and motor vehicles, to name a few (see Annexes). L/7028 Page 30

In the case of motor vehicles, this tax may reach 30 per cent according to engine size, while buses, trucks, pick-ups, special purpose vehicles and motor cycles are excluded. In this case the following rates are applied:

Up to 2,600 cc capacity 102 From 2,601 to 2,800 cc capacity 202 From 2,801 cc and above 302

A.4.3 Production and consumption tax

Prior to March 1990, this was a specific tax applied both to domestic products and to imports. Since that date, and to simplify its administration, the Ministry of Finance and Public Credit has been authorized to transform the specific rates of this tax into ad valorem equivalents. This tax is applied to matches, sugar, beer, petroleum products, spirits and their products, carbonated drinks and cigarettes. The tax is calculated on the ex-works sale price in the case of domestic products and the c.i.f. value in the case of imports (see Table 6).

4.A.4 Sales tax

This is a value-added type tax applied at a rate of 7 per cent to both imports and locally produced goods and some services, with the exception of the products included in the "basic basket", untanned hides and skins, raw tobacco, petroleum, wood, paper waste, books, magazines, school supplies, medicine, agricultural machinery and equipment, insecticides, herbicides and pesticides. In the case of the products such as beer, spirits, liqueurs, and other distilled alcoholic beverages, compound alcoholic beverages, cigarettes and tobacco products, the sales tax is 10 per cent. In the case of new motor vehicles placed on the market the tax is 5 per cent.

Where inputs subject to this tax are purchased with a view to the production of an export good, the exporter is granted a tax credit. The possibility is currently being studied of applying a zero rate mechanism, which would exempt exporters from the sales tax incorporated in purchases of inputs, on justification of their destination.

4.5 Customs rules and procedures

The customs system is governed by the Customs Law which establishes the functions, rules and administration of the customs system and also defines all services and operations of this type. It establishes the Customs as the competent administrative organ in matters relating to the international movement of goods, as well as the entity responsible for the application of the trade régimes, and also sets out the time limits and periods in which customs operations must be carried out. L/7028 Page 31

The Customs Law provides for six types of customs régime, according to the various specific uses to which the goods are to be put. These régimes are:

Definitive régimes: These concern the import or export from or into the customs territory of the country of goods and services for definitive use or consumption, upon payment of the duties and levies payable. This régime comprises definitive export and import.

Temporary régimes: This category includes temporary import , temporary export, re-import, re-export and customs transit.

Inward and outward processing: The inward processing régime includes Temporary Admission, which establishes the framework for the Temporary Import Régime (RIT) and the Export Processing Industrial Zones (ZIP), the Duty Free Replacement Régime and the Drawback System.

Suspensive régimes: The only system provided for is that of customs warehousing, whereby the goods destined either for export or for import remain under customs control with suspension of the application of duties and other levies.

Exceptional régimes: These refer to the free zones, which are understood as that part of the national territory which under certain criteria is considered outside the customs territory. The Law Establishing the Free Zone of Puerto Cortés falls under this régime, which also allows the creation of other free zones in the country.

Supplementary régimes: These concern exclusively the trans-shipment of goods from one means of transport to another under customs control. Operations carried out under the Customs Transit Régime are excluded.

Special régimes: These include the treatment of travellers and baggage, small non-commercial shipments, household effects, postal consignments, catering supplies (vessels and aircraft) and duty-free shops. Decree No. 9-92 recently amended the Customs Law by broadening the benefits of the régime for travellers and baggage (see Annexes).

All the above-mentioned régimes are subject, as appropriate, to the following taxes and charges: customs duties, fines and surcharges, warehousing service fees, fees for other services or consular fees and selective, indirect and other taxes for the application, management and

Temporary import within the meaning of these temporary régimes requires that the goods leave the country just as they entered it, in other words, without having undergone any modification and/or processing that would substantially alter their nature. L/7028 Page 32 collection of which the customs services are responsible. The application, exemption or suspension of payment of the above-mentioned taxes is governed by special laws and regulations, as in the case of the free zones, Export Processing Industrial Zones (ZIP) and Temporary Import Régimes (RIT).

In addition, in the context of the new Central American integration process, the National Congress recently approved the establishment of a Single Window for Customs Formalities in the various land customs offices of the country. It also established a single charge for customs services, expressed in Central American pesos and payable in local currency. Draft regulations have been drawn up on origin of goods, unfair business practices and safeguard action; work is proceeding on draft regulations for the International Transit Way-Bill system; the Handbook of Customs Procedures was introduced with a view to standardizing working methods in the various customs offices; the Single Customs Declaration (DUA) was put into effect, replacing the former customs forms; at the same time, it is intended to establish standard hours of business for the transit of vehicles, goods and persons; negotiations are being conducted on a uniform tariff, of which the nomenclature is based on the Harmonized Commodity Description and Coding System, and the Central American Uniform Customs Code (CAUCA) has been signed: both instruments will enter into force in January 1993.

Customs valuation is governed by the Law on the Customs Valuation of Goods and the regulations thereto (see Annexes) and is based on the "normal price" criterion. The normal price is understood to be the price prevailing at the time of acceptance of the Import Declaration in a transaction considered to have taken place under conditions of free competition. Customs valuation and the conversion to local currency are carried out using a customs valuation factor or reference exchange rate, which is regularly set by the Board of Directors of the Central Bank of Honduras. L/7028 Page 33

V. TRADE RELATIONS AND AGREEMENTS WITH OTHER COUNTRIES

5.1 Introduction

With the signature and recent entry into force of the Transitional Multilateral Free Trade Agreement, the Central American governments have made an important step forward towards revitalizing their integration process, in which endeavour Honduras has participated actively from the outset.

In addition, Honduras has signed numerous trade agreements which have enabled it to expand its trade with Latin American countries and the United States considerably. Below is an outline of past developments in the Central American integration process and the principal trade agreements to which Honduras is a party.

5.2 Economic Community of the Central American Istmus

Since the beginning of the 1950s, with the support of the Economic Commission for , the Central American countries began to build the foundations of their economic integration programme. In June 1958, the countries of the region signed the Multilateral Free-Trade Treaty, which granted unconditional and unlimited m.f.n. treatment to the contracting States. On the same date those countries signed the Agreement on the Régime for Central American Integration Industries, which stipulated that products of industrial plants covered by the régime would be eligible for the benefits of free trade. Subsequently, in September 1959 the Central American Agreement on Equalization of Import Charges was signed. Under that Agreement, the signatory countries agreed to establish a common tariff policy and to draw up a Central American import tariff to meet the needs of their integration and economic development.

In February 1960 , , Honduras and signed the Treaty of Economic Integration (Tri-Partite Agreement). That Agreement marked a significant step in the direction of freeing trade, guaranteeing not only free movement of goods and capital between the three States, but also the movement of nationals of the signatory countries. A time-limit of five years was set for achieving free trade and machinery was established for the automatic incorporation of products subject to restrictions. That Treaty was superseded by the General Treaty on Economic Integration.

The General Treaty on Central American Economic Integration was signed in December 1961 by Guatemala, El Salvador, Honduras and Nicaragua, and entered into force in June of that year. acceded to the Treaty in 1963. Until 1970 this instrument was the institutional basis of the Central American Common Market. The Central American Agreement on Fiscal Incentives for Industrial Development was signed in July 1962 with the L/7028 Page 34 objective of harmonizing the fiscal exemptions granted by each country under national legislation in favour of industrial development. That Agreement marked the origin of the industrial policy based on import substitution.

In January 1971, Honduras withdrew from the Central American Common Market and with the entry into force of Decree No. 97 unilaterally modified its tariff structure. The Decree authorized the Executive Power to engage in bilateral negotiations with other countries to secure trade reciprocity. From the beginning of 1972 until February 1992, the trade of Honduras with other countries in the region was conducted under bilateral agreements or treaties.

In July 1991, on the occasion of the Meeting of Presidents held at San Salvador, El Salvador, the Government of Honduras and the Governments of Costa Rica, El Salvador, Guatemala and Nicaragua signed the Transitional Multilateral Free-Trade Agreement, which was approved by the National Congress in November 1991 and entered into force on 7 February 1992. It exempts some 1,600 tariff headings from payment of import duties and makes provision for the establishment of a system of price bands for certain agricultural products in order to guarantee food security in the region. It will expire automatically upon the entry into force of the definitive multilateral agreement in 1993, which is designed to achieve full free trade in the region. In addition, regional instruments are being drawn up to regulate and co-ordinate certain aspects of economic policy and the establishment and strengthening of regional institutions to facilitate and carry forward the integration process.

In addition, the Central American countries have negotiated a common external tariff, setting a floor rate of 5 per cent and a ceiling rate of 20 per cent, which will enter into force on 1 January 1993 except in respect of goods deemed essential and duties of a fiscal character, coinciding with the entry into force of the Harmonized Commodity Description and Coding System.

5.3 Partial-scope agreements

Partial-scope agreements have enabled Honduras to expand its trade with three Latin American countries by using tariff and non-tariff preferences granted to it as a relatively less-developed country. These agreements are covered by Article 25 of the 1980 Treaty of Montevideo which set up the Latin American Integration Association (LAIA).

The agreement signed with in May 1984 grants tariff and non-tariff preferences on sixteen Honduran products. The agreement signed with Venezuela on 22 September 1986 covers the export of 105 products to that country. The agreement signed with Mexico in October 1984, and further extended in October 1990 covers a total of 177 Honduran products. L/7028 Page 35

In addition, as a Central American country Honduras benefits under the régime of access to the southern frontier strip of Mexico, which grants unilateral preferential treatment for Honduran products with the exception of certain ones considered sensitive, for example textiles, and toys.

5.4 Other trade agreements

Honduras has signed trade agreements with the Republics of , Bulgaria, Colombia, Czechoslovakia, Chile, , Romania, Russia, the -Luxemburg Economic Union and the Kingdoms of and the Netherlands. In addition Honduras has signed a trade agreement based on the m.f.n. clause with the United States and is a beneficiary under the Generalized System of Preferences adopted by the developed countries in the 1970s with the approval of GATT.

In addition, Honduras is a beneficiary under the Caribbean Basin Economic Recovery Act adopted by the United States in August 1983 with the aim of promoting the region's economic recovery. Under that instrument, products of the Caribbean region beneficiary countries are exempted from taxes and cnarges, with the exception of textiles, footwear, tuna fish, petroleum and watches. In addition, on 1 November 1990 the Governments of Honduras and the United States signed an agreement establishing the Trade and Investment Council, which aims to monitor relations, identify opportunities and eliminate barriers to trade and investment flows between the two countries (see Annex).

In 1991 the Central American countries signed with Mexico and Venezuela the bases for framework agreements on trade and investment, designed to foster substantial opening of the markets of those two countries to imports of Central American products and move towards a free-trade area to be established by 31 December 1996. Both agreements fall within the context of the rights and obligations accruing to all parties to the GATT (see Annexes). L/7028 Page 36

VI. OTHER TRADE-RELATED ASPECTS

6.1 Introduction

The exchange policy of Honduras was modified in March 1990 when a new exchange system was introduced establishing the Customs Valuation Factor, used to estimate the value of foreign trade transactions. In addition, since that date the Government has approved other measures designed to deregulate the economy and modernize and rationalize public sector activity. In this section we shall briefly examine developments in exchange policy and legislation recently approved or in the course of approval to constitute a legal basis to foster self-sustained development of Honduras.

6.2 Exchange policy

Under Decree No. 51 of 1 February 1950, the currency unit of Honduras is the lempira. In August of that year, Honduras officially notified the International Monetary Fund that with effect from 1 July 1950 the official exchange rate of the lempira against the United States dollar would be L 2.00 = US$1, thus complying with the obligations of Article VIII, Sections 2, 3 and 4 of the Articles of Agreement of the IMF.

Until the end of the 1970s, the economy of Honduras was characterized by exchange stability, in contrast with the first five years of the 1980s, when the real effective exchange rate of the lempira appreciated considerably. In order partly to offset this appreciation, as of 1985 the authorities introduced exchange incentive measures, allowing some exporters to retain part of their export earnings to pay for their own imports. At the end of 1987, a ceiling of 30 per cent of export earnings was set for self-financing of imports, and the system was extended to cover all exporters. In February 1988 the self-financing mechanism was further extended with the introduction of a system of Transferable Certificates of Option on Foreign-Exchange Earnings from Exports (CETRAS). These documents were issued to exporters by commercial banks, offering up to 50 per cent of the value of their exports at an exchange rate that reflected the non-official market.

In the context of a system for financing trade with other Central American countries, exporters to Costa Rica, El Salvador and Guatemala were allowed to retain their export earnings in order to import from those countries. For such transactions the rate of exchange was freely negotiated and fluctuated around the quotation in the parallel market.

The combined effect of these mechanisms resulted in a situation of multiple exchange rates for exporting, the effective nominal rate of exchange being a weighted average between the quotation on the official market and on the parallel market. All these various measures resulted in L/7028 Page 37 a lack of transparency in the exchange market which contributed to export stagnation. Furthermore, the exchange differential boosted speculative demand for foreign exchange, distorting the tax base and facilitating tax evasion.

On 13 March 1990 the fixed exchange rate of L 2.00 = US$1 was suspended and a new exchange system was made effective (see Decree Law No. 18-90 annexed hereto). Under this new system, foreign trade transactions are estimated at a reference exchange rate, or Customs Valuation Factor, which was initially set at L 4.00 = US$1. This reference rate is determined periodically by the Board of Directors of the Central Bank of Honduras, which makes adjustments according to market conditions as reflected in the performance of the principal economic and financial indicators. In December 1991, the reference exchange rate was L 5.40 = US$1.

As regards trade within Central America, exports to countries of the region in amounts in excess of US$3,000 can be settled through the Central American Payments System (SCP) or the banking system. Exports of agricultural products in amounts exceeding US$5,000 are settled in United States dollars through the banking system or the SCP. Imports from Central America can be settled using any means of payment without Central Bank intervention, or subject to the requirements laid down for imports from outside the region, in United States dollars or through the SCP.

Rates for the purchase and sale of other major currencies in the foreign trade of Honduras are fixed daily on the basis of the international market exchange rates for purchase and sale of the currency concerned in relation to the United States dollar. There are no charges or subsidies on the purchase or sale of foreign currency; nevertheless an exchange commission, payable in lempiras, of 1 per cent and 1.5 per cent is charged on the dollar value of foreign exchange purchases by the Government and by other purchasers, respectively.

Under the regulations in force, an exporter must repatriate foreign exchange through the banking system, while being allowed to retain 30 per cent of his earnings subject to prior authorization by the Central Bank, in order to meet his import needs. There are no restrictions on repatriation of profits, family remittances and foreign exchange from tourism.

An importer can finance his purchases with external loans, self-financing, supplier credit or purchase of foreign exchange from a bank. In this latter case alone an application must be made to the commercial bank. There are no regulations regarding payment for services. L/7028 Page 38

Lastly, in February 1992 the National Congress approved the Law on Foreign Exchange Bureaux, under which non-banking institutions are authorized to purchase and sell foreign exchange, at a price determined by the supply and demand situation for foreign exchange. Under this Law, the Central Bank is empowered to supervise the functioning of foreign exchange bureaux and to intervene in their operations to ensure exchange stability.

6.3 Legislation recently adopted or in the course of approval

The Government of Honduras is continuing to implement its policy of economic deregulation, including updating and rationalization of public sector prices, so as to create conditions that would attract greater participation of private initiative and promote self-sustaining development. One necessary step is to establish an adequate legal framework. In this context, some important laws have been approved and are currently at various stages of review, including the following:

Law on Agricultural Modernization

This Law, which was recently approved by the National Congress, is designed to establish a legal framework to foster development in the agricultural sector. This implies modifying existing policies and institutions in this sector, so as to reduce bureaucratic procedures and direct State intervention, in order to establish an adequate framework to promote agricultural investment, increased production, development of agro-industry and agricultural exports, ultimately bringing greater job creation in rural areas.

Among the reforms concerned, the most outstanding are the following: elimination of the causes of discretionary assignment, which was permitted under the earlier Agrarian Reform Law, so as to guarantee security of land tenure; legalization of rental and co-investment, so as to afford investment opportunities for domestic and foreign capital; creation of the institutional framework for better domestic and foreign marketing of all agricultural products and lifting of prior permit requirements for the import of machinery, equipment and inputs; in addition, elimination on 31 December 1993 of export charges on non-traditional agricultural products including wood.

Investment Law

The new Investment Law currently before the National Congress is designed to stimulate and guarantee domestic and foreign private investment in order to encourage production and transfer of technology, increase exports and generate employment. The new law lays down a legal and administrative framework to ensure the investor of investment security and L/7028 Page 39

afford stability and clarity of regulations. Foreign investment is considered complementary to domestic investment and will receive non-discriminatory treatment.

Under this Law, no specific approval is required for investing in Honduras, except in respect of investments relating to public health, national security and conservation of the environment, which are to be regulated by the State.

Restructuring of the Ministry of the Economy and Trade

In the context of the Economic Structural Adjustment Programme, the Ministry of the Economy and Trade has undertaken a major institutional and functional restructuring in order to adapt the planning and implementation of its activities to the global strategy of economic stabilization and development.

This Ministry is accordingly to be re-named the "Ministry of Economic Development" and its principal objectives are to include the promotion, diversification and facilitation of productive and trade activities, by creating a climate conducive to both domestic and foreign investment.

Intellectual Property Rights

In regard to intellectual property, the principal laws of Honduras date back to 1919, in which year our country adopted the International Classification of Goods and Services; the Patent Law was drawn up on the basis of that classification, and Honduras is a signatory of the Inter-American General Convention on Trademarks and Trade Protection. The most recent reform of the Trademarks and Patents Law was in 1977, but today it is no longer up-to-date in terms of the new legal order on intellectual property.

The existing legislation in this area is currently under review and the Ministry of the Economy and Trade is drawing up an Industrial Property Bill which is based on the relevant provisions laid down by the World Intellectual Property Organization (WIPO), integrating them in the legal system of Honduras. One of the main objectives of this Bill is to prevent piracy or theft of trademarks by affording better protection, and lay down sanctions for infringement of intellectual property rights.

New aspects in this Bill include an extension of protection to inventions and distinctive signs, which are to be governed by one single body of law, unlike the existing legislation which regulates them separately. The innovations include regulation of patents, utility models and industrial designs. The Bill does not prohibit the patenting of L/7028 Page 40 processes and pharmaceutical compounds, as is the case in the existing legislation. It covers distinctive trademark signs, trade names, signs, emblems, geographical indications and designations of origin, in contrast with the existing legislation which only regulates trademarks, service marks and trade names.

As regards copyright, the Ministry of the Economy and Trade is at present drawing up a Bill which covers the rights of Honduran authors, whether resident in the country or abroad. This Bill will afford protection to the authors and proprietors of literary, artistic, didactic or scientific works as well as to performers, producers and bodies holding neighbouring rights. L/7028 Page 41

STATISTICAL TABLES

» TABLE 1 Gross Domestic Product by Economic Activity ha f DO ~J (0 o (in million lempiras) M *• 00 At constant prices of 1978

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

Agriculture, forestry, hunting 985.00 1,007.00 1,052.00 983.00 1,056.00 1.080.00 1,072.00 1,161.00 1,155.00 1,271.00 1,285.00 1,329.00 and fishery Mining and quarries 66.00 60.00 72.00 78.00 87.00 89.00 83.00 51.00 69.00 78.00 71.00 75.00 Manufacturing industry 529.00 526.00 502.00 534.00 575.00 582.00 606.00 646.00 678.00 704.00 709.00 709.00 Construction 202.00 176.00 208.00 228.00 240.00 221.00 177.00 184.00 211.00 242.00 218.00 134.00 Electricity, gas and water, 249.00 276.00 297.00 305.00 317.00 329.00 334.00 348.00 372.00 396.00 411.00 415.00 transport, storage and corrmjnications Restaurant and hotel trade 560.00 586.00 518.00 480.00 462.00 463.00 507.00 517.00 531.00 507.00 503.00 518.00 Financial, insurance, real 209.00 220.00 207.00 211.00 230.00 235.00 247.00 264.00 299.00 325.00 335.00 355.00 estate and business services Housing 209.00 220.00 232.00 244.00 236.00 254.00 258.00 272.00 288.00 300.00 313.00 325.00 Public administration and 262.00 289.00 278.00 266.00 273.00 316.00 314.00 329.00 331.00 341.00 291.00 280.00 defence Community, social and personal 336.00 341.00 320.00 319.00 313.00 326.00 360.00 384.00 406.00 410.00 406.00 363.00 services

GROSS DOMESTIC PRODUCT 3,659.00 3,757.00 3,746.00 3,712.00 3,856.00 3,972.00 4,040.00 4.252.00 4,448.00 4,687.00 4,670.00 4,728.00 At factor cost

Plus net indirect taxes 407.00 412.00 365.00 361.00 394.00 456.00 420.00 477.00 499.00 474.00 495.00 553.00

GROSS DOMESTIC PRODUCT 4,066.00 4,169.00 4.111.00 4,073.00 4,250.00 4,428.00 4,460.00 4.729.00 4,947.00 5.161.00 5,165.00 5,281.00 At market prices

Source: Central Bank of Honduras, February 1992 revision TABLE 2

Baldrice of Payments of Honduras (in mi II ion dollars)

Item 1980 1981 1982 1983 19LU 1935 l'J86 1987 J9&8 1989 1J9U 1991

I. BALANCE OF GOODS AND (338.30) (330.20) (254.40) (263.70) (396.45) (349.76) (305.60) (280.60) (311.00) (266.30 (345.50) (346.30) SERVICES A. EXPORTS OF GOODS AND 967.45 903.20 783.50 814.95 863.15 918.20 1,022.10 976.60 1,019.50 1,032.80 997.10 985.80 SERVICES 1. EXPORTS OF GOODS 850.25 783.80 676.50 698.65 737.00 789.60 891.20 832.80 874.90 883.40 847.80 832.80 2. EXPORTS OF SERVICES 117.20 119.40 107.00 116.30 126.15 128.60 130.90 143.80 144.60 149.40 149.30 153.00 B. IMPORTS OF GOODS AND 1.305.75 1.233.40 1,037.90 1,078.65 1,259.60 1,267.95 1,327.70 1,257.20 1,330.50 1,299.10 1.342.60 1,332.10 SERVICES 1. IMPORTS OF GOODS 954.05 898.60 680.70 756.25 884.80 879.15 874.10 813.00 870.40 834.90 869.70 853.20 2. IMPORTS OF SERVICES 351.70 334.80 357.20 322.40 374.80 388.80 453.60 444.20 450.10 464.20 472.90 478.90

II. TRANSFERS 21.50 27.50 30.00 44.50 80.00 145.60 158.40 131.30 135.00 72.00 233.10 128.70

Ill . BALANCE ON CURRENT ACCOUNT (316.80) (302.70) (224.40) (219.20) (316.45) (204.15) (147.20) (149.30) (176.00) (194.30) (112.40) (217.60)

IV. CAPITAL ACCOUNT 281.55 240.50 97.05 194.05 311.45 255.05 166.10 243.30 225.50 257.60 217.70 191.90

A. LONG TERM 270.60 226.85 134.50 152.35 264.05 255.35 68.30 92.30 94.20 58.80 101.60 34.40 1. PRIVATE SECTOR 110.25 32.65 (1.20) (35.55) (35.35) (0.40) (12.00) 14.00 29.40 32.70 21.60 32.10 2. PUBLIC SECTOR 131.25 190.35 116.55 174.20 263.00 172.30 44.50 32.80 53.10 6.30 66.30 (1.40) 3. BANKING SECTOR 9.70 11.30 13.60 8.30 21.95 91.40 38.40 46.80 13.90 (52.90) (10.80) (30.50) 4. COUNTER CREDITS 19.40 (7.45) 5.55 5.40 14.45 (7.95) (2.60) (1.30) (2.20) 72.70 24.50 34.20 B. SHORT TERM 10.95 13.65 (37.45) 41.70 47.40 (0.30) 97.80 151.00 131.30 198.80 116.10 157.50

V. ERRORS AND OMISSIONS (22.85) (0.10) 10.40 21.30 (41.40) (56.70) (15.50) (46.10) (23.40) (65.00) (93.70) 116.20

•a f VI. CHANGE IN INTERNATIONAL 58.10 62.30 116.95 3.85 46.40 5.80 (<••4<) (47.90) (26.10) 1.70 (56.20) (90.50) B> — on -^i RESERVES fD o (the minus sign indicates *- CO increase) w

Source: Based on statistics of Central Bank of Honduras, February 1992 revision L/7028 Page 44

TABLE_N(K_3A

Honduras^ Iotal_Externa2_Debt

(in mi 11 ion US dollars)

1989 1990 1991

Total % Total % Total

TOTAL EXTERNAL DEBT 3.253.7 100.0 3.466.7 100.0 3,153.6 100.0 MULTILATERAL 1.648.6 50.7 1.699.3 49.0 1.741.9 55.2 IMF 54.8 1.7 30.2 0.9 31.0 1.0 IDB 648.5 19.9 679.0 19.6 665.9 21.0 CABEI 266.3 8.2 295.0 8.5 301.7 9.6 IBRD 559.7 17.2 578.7 16.7 577.3 18.3 IDA 76.8 2.4 74.5 2.1 123.4 OPEC 22.0 0.7 22.0 0.6 22.2 I I FAD 12.7 0.4 12.7 0.4 12.7 0.4 BLADEX 4.4 0.1 4.4 0.1 4.4 0.1 OTHER 3.3 0.1 2.8 0.1 3.3 0.1 0.0 0.0 0.0 BILATERAL 1.313.0 40.4 1,482.7 42.8 1.172.8 37.2 PARIS CLUB COUNTRIES 1,068.5 32.8 1,195.6 34.5 873.0 27.7 LATIN AMERICAN COUNTRIES 238.6 7.3 262.1 7.6 275.4 8.7 OTHER 5.9 0.2 25.0 0.7 24.4 0.8 0.0 0.0 0.0 PRIVATE CREDITORS 192.7 5.9 203.4 5.9 146.4 4.6 SUPPLIERS 49.0 1.5 51.6 1.5 50.0 1.6 COMMERCIAL BANKS 143.7 4.4 151.8 4.4 96.4 3.1 0.0 0.0 0.0 UNSECURED PRIVATE SECTOR 99.4 3.1 81.3 2.3 92.5 2.9

Source: Central Bank of Honduras, February 1992 revision

* 4 IABLE3B

Honduras^ Eyb^içExternaJOebt (in US$ mi 11 ion)

DESCRIPTION 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991

MULTILATERAL FINANCING 468.5 578.9 663.6 771.7 933.7 1,130.7 1,201.75 1.226.3 1,234.8 1,302.9 1,337.6 1,383.7 1,433.9 KCEHHES~ Central American Economie 118.9 130.2 143.6 156.75 181.45 202.75 193.5 185.2 186./ 183.2 174.3 181.1 179.5 Integration Bank Inter-American Development 164.9 210.8 247.9 288.75 339.2 481.9 545.3 566.6 573.1 606.1 618.9 657.2 655.4 Bank

International Bank for 131.4 152.2 175.6 217.55 253.8 314 349 360.1 361 399 428.5 431.7 436.2 Reconstruction and Development International Development 46.6 64 75.3 76.05 80.8 75.6 79.9 79.3 78.7 78.1 76.8 74.6 123.5 Association

Central American Monetary 5 20 16 20.5 59.3 24 . - - - - - _ Stabilization Fund Organization of Petroleum 1.7 1.7 5.2 5.15 11.35 21.15 21.9 22.4 22.3 22.3 22 22 22.2 Exporting Countries IDB Savings and Loans 6.95 7.8 4.65 3.85 3.8 3.8 3.6 - - - International Fund for 6.65 8.3 8.9 9.2 10.6 12.7 12.7 12.7 Agricultural Development BLADEX ------. - - - - 4.4 4.4 4.4 BILATERAL CREDITS 186 208.6 252 328.45 367.9 466.85 497.75 552 584.4 662.6 1,116.2 1,251.1 936.3 Canada 10 12.5 13.7 14 14.5 20.35 29 29.2 29.2 29.2 42 40.9 40.9 United States of America 88.2 96.1 117.6 177.85 207.15 267.6 276.6 306.4 328.9 385.7 484.3 529.9 120 Venezuela 87.8 100 120.7 122 136.4 138.35 129.7 139.4 139.2 143.8 35.4 40.7 45.9 Japan . - . . - 27.25 32.7 47.1 57.7 74.6 198.2 256.1 258.1 Germany - - - - - . . - - - 50.7 59.5 77.1 France - - - . - - . - _ - 79 92.3 101.7 Other - - - 14.6 9.85 13.3 29.75 29.9 29.4 29.3 222 227.5 288.7 COMMERCIAL BANK 183.3 224.4 266.9 334.9 356.65 452.3 467.8 502.2 504.6 540.4 142 132.5 96.5 •n r SUPPLIERS AND OTHER 26 95.2 105.1 101.25 140.8 53.5 66.75 71.2 79.7 81.8 49 51.5 49.9 o TOTAL 863.8 1,107.1 1,287.6 1,536.3 1,799.05 2.103.35 2,234.05 2,351.7 2,403.5 2,587.7 2,644.8 2,818.8 2,516.6 OO

Source: Ministry of Finance and Public Credit, February 1992 Revision L/7028 Page 46

TABLE 4 Honduras: Selected Macro-Economic Indicators, 1989-1991

Item 1989 1990 1991

Real Gross Domestic Product at a.p. (Million lempiras of 1978) 5.161.00 ,165.00 5,281.00 Annual growth rate (%) 4.3 0.1 2.2

Balance of payments (USS million) Balance on current account -194 -113 -217 Balance of goods and services -266 -346 -346 Exports 1,033.00 997.00 986.00 Imports 1,299.00 1,343.00 1.332.00 Transfers 72.00 233.00 129.00 Net international monetary reserves -88 -32 59 (US$ million)

Index of consumer prices (1978=100) December of each year (* variation) 11.4 36.4 21.4 Annual average (% variation) 9.8 23.3 34.0 Monetary overview (million lempiras)

Monetary supply 3,782.00 4,465.00 5,119.00 Total domestic credit 4,988.00 5,320.00 5,468.00 Credit to the public sector (net) 1,524.00 1,422.00 1,175.00 Credit to the private sector 3,464.00 3,898.00 4,293.00 Rate of exchange (lempiras to US$1.00, end of year)

Official 2.0 5.30 5.40 Free 3.9 5.50 5.70 Central Government Fiscal Overview (million lempiras) Savings on current account -342 -182 157 Current revenues 1,532.00 2,062.00 2 ,839.00 Current expenditure 1,874.00 2,244.00 2 ,682.00 Capital expenditure 407.00 824.00 566.00 Net loans 2 -44 82 Deficit or surplus -750 -963 -491 Net fiscal deficit/GDP (%) 7.2 7.7 3.0

Source: Based on statistics of Central Bank of Honduras, February 1992 Revision TABLE 5

Duties and Charges on Exports

DUTIES LEGAL BASIS

Product Unit Specific Ad valorem Additional Decree Reform

Coffee 46 kg. sack 3.51 on f.o.b. value L 10.00 x sack No. 80 No. 10-92 05/04/85 14/02/92 No. 175-87 30/10/87

Bananas 40 lb. box US$0.50 No. 3 No. 28-91 20/2/58 21/03/91 No. 143 29/08/74

Minerals 5! , silver, No. 873 No. 213-87 platinum 26/12/87 29/11/87 IX other Export tariff

Marine products Kg- US$0.10 No. 213-87 No. 37-91 29/11/87 23/04/91

Cattle, pigs and Head L 0.50 to L 30.00 No. 873 No. 213-87 poultry 26/12/79 29/11/87 (live animals)

Bovine meat lb. US$0.02 No. 213-87 Idem 29/11/87

Sugar 46 kg. sack Exempt up to US$15.00 No. 873 No. 34-90 51 in excess of L 6.00 26/12/79 26/04/90 102 to 501 additional amounts Other products (other than the tf IT" above) IX of f.o.b. value No. 213-87 0Q -J 29/11/87 (Ï O #• 00 ^1 Source : Based on information from the Ministry of Finance and Public Credit, February 1992 revision. L/7028 Page 48

TABLE 6

Honduras: Production and Consumption Taxes

Legal Coverage Tax Rate in Product Remarks base force

Matches Dec. No. 3 Domestic Where domestic, ex-works 12.5X Section K and price. Agreement No. 339 imported Agreement No. 1981-A products Where imported, c.i.f. value.

Sugar Dec. No. 3 Domestic Calculated for each 0.0315789 Ad valorem Section E and and 100 lbs of sugar equivalent amendment imported processed and sold for factor (a) (23/08/87) products consumption in Honduras Agreement 1983-A For imported sugar, c.i.f. value of each 100 lb.

Beer Dec. No. 3 Domestic Where domestic, Section C and ex-works price. Amendment 20/2/58 imported Agreement No. 339 products For imported beer, c.i.f. 0.3307086 Ad valorem 08/03/58 value. equivalent Agreement 1982-A factor (a) In both cases, per bottle of 12 fl.oz.

Petroleum Dec. No. 121 Locally For domestic products, 151 For: products 29/10/67 refined the tax is collected at - Aviation spirit Agreement No. 151 and the time of ex-works - Premium super gasoline 11/05/78 imported sale. - Regular gasoline Dec. 76-91 products - Kerosene For imports, at the - Jet-fuel time of customs clearance.

Spirits, Dec. No. 20 Domestic For domestic products, Ad valorem equivalent factors (a) liqueurs 30/11/56 and on ex-works price per 1.5835777 - Brandies (b) and Agreement 1251 imported litre processed. 2.8205128 - Beverage-grade alcohol (c) products 26/11/84 products 0.4420432 - Compound liqueurs and distilled thereof Agreement No. 30 alcoholic beverages (d) 24/05/92 For imports, c.i.f. 0.1219512 - Denatured alcohol (e) value plus duties, taxes and service charges applicable to imports plus 15Ï of estimated € profit per litre imported. L/7028 Page 49

TABLE 6 (cont'd)

Honduras: Production and Consumption Taxes

Legal Coverage Tax Rate in Product Remarks basis base force

Mineral waters Dec. No. 3 Domestic and Where domestic, ax Section L imported ex-works price per Agreement No. 339 products 12 oz bottle Section L 18/13/58 Where imported, c.i.f. value plus duties and other charges applicable to imports per 12 oz bottle.

Cigarettes Dec. No. 106 Domestic and Where domestic, 65Z 30/06/55 imported ex-works price tax-free Agreement No. 220 products 28/10/55 Where imported, c.i.f. value plus import duties and charges

(a) The tax is determined by multiplying the ad valorem equivalent factor by the tax base (b) The value resulting from application of the equivalent factor may in no case be less than L 5.40 (c) The value resulting from application of the equivalent factor may in no case be less than L 5.50 (d) The value resulting from application of the equivalent factor may in no case be less than L A.50 (e) The value resulting from application of the equivalent factor may in no case be less than L 0.25

Source: Based on information from the Ministry of Finance and Public Credit

I L/7028 Page 50

ANNEXES1

ANNEX 1: Law on the Structural Re-organization of the Economy, Decree Law 18-90

ANNEX 2: Law on the Central Bank of Honduras

ANNEX 3: Export Tariff and amending Decrees

ANNEX 4: Decree Law establishing CENTREX

ANNEX 5: Sanitary Regulations for the Import and Export of Animals and Animal Products

ANNEX 6: Law on Plant Health

ANNEX 7: Health Code

ANNEX 8: Law on Foreign Exchange Receipts from Exports, and Implementing Regulations

ANNEX 9: Import Charges

ANNEX 10: Customs Laws

ANNEX 11: Law Establishing the Free Zone of Puerto Cortés

ANNEX 12: Decree Law on the Temporary Admission Régime

ANNEX 13: Law on Industrial Processing Zones for Export Trade

ANNEX 14: Law on Incentives to Banana Production

ANNEX 15: Law on Government Procurement

ANNEX 16: Selective Consumption Tax

ANNEX 17: Production and Consumption Tax

ANNEX 18: Sales Tax

ANNEX 19: Declaration of Antigua

ANNEX 20: Transitional Multilateral Free-Trade Agreement of Central America

The Annexes are available for consultation in the Office of the Special Adviser to the Director-General (Office 2017). L/7028 Page 51

ANNEXES (cont'd)

ANNEX 21: Partial-Scope Agreement between the Republic of Colombia and the Republic of Honduras

ANNEX 22: Partial-Scope Agreement between the Republic of Honduras and the United Mexican States

ANNEX 23: Partial-Scope Agreement between Venezuela and Honduras

ANNEX 24: Agreement between Honduras and the United States of America on the Establishment of the Trade and Investment Council

ANNEX 25: Declaration of Tuxtla Gutierrez

ANNEX 26: Multilateral Framework Agreement between Mexico and Central America

ANNEX 27: Multilateral Framework Agreement between Venezuela and Central America

ANNEX 28: Law on Agricultural Modernization